An individual that is contemplating retirement is typically concerned about financing his retirement years. Through scientific enhancements and medical advances, the individual may live longer than expected. For many retirees today the prospect of outliving financial resources is very real.
Annuity products can provide the individual with level distributions in retirement. Typically, annuities are provided by financial institutions as stand-alone products. As such, the individual would manage his own assets through an accumulation phase and a distribution phase. Amounts available for distribution are uncertain because funds are subject to market performance.
One known approach to overcoming the uncertainty is a “minimum withdrawal feature” that may be available as an annuity product rider. When a minimum withdrawal feature is used, assets must be invested, typically, in vehicles that are selected by a third party insurance company that provides the annuity product. The third party insurance company often provides the annuity product as an insurance benefit under an insurance policy. To attenuate risk, the third party insurance company may govern the individual's choice of investment vehicles. Minimum withdrawal features are expensive. Also, the third party insurance company may be entitled to charge an early-termination fee to penalize the individual for changing investment vehicles.
Consumers of retail banking products and services are an untapped market for the sale of annuity products. This is because the benefits, liabilities and fees associated with annuity products and minimum withdrawal features are often confusing and difficult to promote to such consumers.
For example, a financial institution customer may purchase an annuity product that carries a surrender period penalty. The penalty may range from one to several years. The penalty may depend upon the type of shares purchased. The customer's assets typically must be moved outside of the financial institution to a third party insurance carrier. The customer may then manage the investment of the assets within mutual funds selected by the insurance carrier. The customer may then choose to add a lifetime guaranteed minimum withdrawal benefit feature to the annuity product (the “base annuity” or “base annuity product”).
Typically, adding the minimum withdrawal benefit feature is expensive. The base annuity and the lifetime guaranteed minimum withdrawal benefit feature typically costs the customer over 300 basis points (3% of asset value) annually. The customer may also pay fees associated with the mere investment of the assets. The expense of the minimum withdrawal benefit feature, coupled with the complexity of the annuity product's design, deters customers from purchasing the product and decreases the value of the product to the financial institution.
FIG. 1 shows typical process 100 by which a customer may obtain an annuity product. Process 100 begins at step 102. At step 102, the customer meets with a financial advisor to discuss retirement income distribution. At step 104, the financial advisor and the customer determine whether the income strategy adequately addresses the possibility that the customer will outlive his assets (a “longevity issue”). If at step 104 it is determined that the income strategy adequately addresses longevity issues, process 100 continues at step 106. At step 106, the customer continues with the existing accumulation/distribution strategy.
If at step 104 it is determined that the income strategy does not adequately address longevity issues, process 100 continues at step 108. At step 108, the customer may purchase an annuity with a lifetime income guarantee feature. The lifetime income guarantee feature costs the customer about 300 basis points (based on the value of the underlying investment) per year. The annuity and the guarantee are administered by an insurance company.
At step 110, the customer transfers assets to the insurance company. At step 112, the customer (along with the financial advisor) selects one or more of the insurance company's investment options as investment vehicles for the assets. At step 114, the customer begins taking retirement income distributions. If the customer takes distribution of all the assets prior to his death, process 100 continues at step 116. At step 116, the insurance company's annuity product makes payments to the customer in place of the distributions from the assets.
If the customer dies before taking complete distribution of the assets (and interest), process 100 continues at step 118. At step 118, the customer's beneficiaries receive the remaining assets (and interest).
As a result of the aforementioned drawbacks, many financial institution customers keep large portions of their retirement income in traditional retail banking products like certificates of deposit and savings accounts. Such banking products are FDIC insured. FDIC insurance provides protection against risk, but the banking products require such customers to sacrifice possible higher rates of return and lack guaranteed income features. The sacrifice of higher rates of returns increases the likelihood that the customer will outlive his retirement savings. Investment in such products also requires overcoming the frequent challenge of shopping for the best rate in the marketplace.
It would be desirable, therefore, to provide apparatus and methods for providing financial products that are based on retail banking assets and provide guaranteed distributions during the life of a banking customer.